labels: World economy
Commonwealth Bank raises funds at a discount, amid recesion news
18 December 2008

Commonwealth Bank of Australia Ltd (CBA), Australia's largest mortgage lender and third largest lender by assets, raised A$2.0 billion ($1.4 billion) in a share placement, after scrapping a previous offer due to dispute over disclosure issues with its advisor Merrill Lynch.

The Commonwealth Bank terminated the share placement agreement with Merrill Lynch International Australia Limited on the basis that Merrill Lynch did not inform potential investors of the various disclosures made by the bank.

Under the terms of the agreement, Merrill Lynch was required to provide full disclosure to all potential investors before investors were required to commit.

The Commonwealth Bank expressed its disappointment that Merrill Lynch did not meet its obligations.   

The bank then turned to UBS AG to arrange the A$2 billion ($1.4 billion) sale, with A$1.65 billion selling for A$26 a share as against the A$27 it was to be placed earlier, it said in a statement.

The Commonwealth Bank and Merrill Lynch were locked in a multimillion-dollar battle over the embarrassing fiasco that forced the bank to scrap a $2 billion capital raising and then replace it with a cut-priced deal at a lower cost.

Inadequate disclosures
Some analysts place the blame squarely on the Commonwealth's shoulders. Saying that the bank has obviously made a massive mistake, the bad debts should clearly have been flagged ahead of the issue.

 It is understood the Commonwealth is likely to sue Merrill's for tens of millions of dollars to cover the difference between the price of its $2 billion capital raising made late on Tuesday at $27 a share and its replacement yesterday with a $1.65 billion exercise that was made at $26. The investment bank would also lose lucrative fees associated with the aborted placement.
 
The Commonwealth Bank has accused Merrill Lynch for Tuesday's placement being terminated. It claims that the broker did not inform potential investors of various disclosures made by the bank.

These included an increase in impairments of which the bank informed the market after the placement had occurred, when it reveal the impairment charge on its loan book will rise to around 60 basis points this year the equivalent of 1.6 billion dollars.

Commonwealth's Tier 1 Capital Ratio, a key measure of financial health, will rise to about 8.5 per cent at the year end, it said in the statement detailing UBS's sale. The bank doesn't expect to underwrite its dividend reinvestment plan, and will be offering a share purchase plan to shareholders, details of which will be announced February next year.

Bad debts have become an acute problem with the bank's balance sheet. Bad loans have jumped to A$930 million in fiscal 2008 from A$496 million a year earlier. The commanwealth bank has made loans worth A$150 million to Lehman, A$170 million to Allco, and A$240 million to ABC Learning Centres Ltd. All three companies collapsed this year.


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Commonwealth Bank raises funds at a discount, amid recesion